Shareholder vs Stakeholder; does it matter ?
In Aug 2019, the Business Round-table announced the release of a new statement, signed by 181 member CEO's, that redefines the "purpose of a corporation". The CEO's committed to leading their companies for the benefit of all their stakeholders - their customers, employees, suppliers, communities and shareholders. "The Business Round-table, since its inception in 1978, has endorsed the principle of shareholder primacy, that corporations exist to serve their owners, the shareholders". This new announcement supersedes all others and is a sea change in its ideologies.
There are two prevailing ideas on this topic, one by Milton Friedman that argues the fundamental obligation of leaders is to return profits to shareholders, while Edward Freeman believes companies should take a stakeholder approach and equally consider the community, people, employees etc. Are they mutually exclusive or opposing ideas ? They seem to be complementary perspectives and when deployed together could benefit the company and its shareholders. In its strictest sense, they may look diverging, but this could be an opportunity to start implementing the Stakeholder approach as a complementary extension to the Shareholder ideals. It is a "YES, AND", rather than an "OR".
The established Shareholder approach is nebulous at best and is open to interpretation. Since a public company does not know exactly what the “owners” want, it ends up using “increase in equity” as the common denominator. There is no timeline associated with “increase in equity” and there are no set guidelines, except that the leaders stay within the confines of the law. Thus, the Stakeholder approach is an optically rewarding and welcomed addendum to the Shareholder prime directive. A company has many stakeholders and without which it cannot survive. It needs employees, a welcoming town for its offices, a proud community and a lot of customers for its products. So, spending time, money and efforts on the town, the customers and the community are considered stakeholder spend, which in return provides positive optics to the public and a stable base for business and its employees to thrive.
Are we not enabling the Shareholders wishes by extending the Stakeholders game? Richard Branson, founder of Virgin group so eloquently put, "Clients do not come first. Employees come first. If you take care of your employees, they will take care of the clients". Is this not to ensure Virgin Group thrives and its shareholder equity increases ? How about this quote from Southwest Airlines, "we believe that if we treat our employees right, they will treat our customers right, and in turn that results in increased business and profits that make everyone happy," So, to focus on the stakeholder is to reject short term gains in favor of a long-term strategic and sustained growth. Transparency is key. Company actions must be open, honest and should even call out the value these actions bring to the community and to the organization.
We hear about many ways companies address stakeholder satisfaction. But, if there are no inherent shareholder value in these engagements, are there organizations that engage in substantial anonymous philanthropy? never claimed tax benefits for these donations ? and take up a cause that is not connected to their field of work ? Think about it.